Knorr Bremse : Compensation report 2023

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Compensation Report

Introduction

Overview of the Fiscal Year

This compensation report explains the principles of the compensation systems for the Executive Board and Supervisory Board of Knorr-Bremse AG and the compensation granted and owed within the meaning of section 162 (1) sentence 1 AktG (Aktiengesetz: German Stock Corporation Act) to the current and former members of the Executive Board and Supervisory Board, in each case relating to the 2023 fiscal year (January 1 to December 31, 2023).

This compensation report takes into account the feedback regarding the 2022 compensation report that the company received from investors in conjunction with its approval at the 2023 Annual General Meeting as well as independently in dialog with investors. The 2022 compensation report was approved with a majority of 68.44% of the valid votes cast, which, in the management's view (un- changed from the previous year), represents a critical assessment by investors. In order to reflect this, the Executive Board and Supervisory Board have decided not only to provide more detail in the descriptive sections of this compensation report but also to amend the provisions of the incentive architecture (STI, LTI) with effect from Janu- ary 1, 2024, and to gradually implement malus and claw- back arrangements in the service agreements of the Executive Board members. The necessary amendments of the compensation system will be presented for approval to the Annual General Meeting on April 30, 2024. They are described in detail in the invitation to the Annual General Meeting published on March 21, 2024. This compensation report consistently discloses the compensation granted and owed in accordance with section 162 (1) sentence 2 no. 1 AktG for the fiscal year in which the underlying work (one or more years) was completed in full. For the variable compensation components, the compensation subtargets and the calculation of the actual target achievement are presented and described in detail.

The compensation report was jointly prepared by the Executive Board and the Supervisory Board. It was reviewed with regard to form and content by KPMG AG Wirtschaftsprüfungsgesellschaft above and beyond the requirements of section 162 (3) AktG. The auditor's report is included in the 2023 compensation report.

This compensation report is planned to be presented for approval at the Annual General Meeting on April 30, 2024.

Business

The Executive Board of Knorr-Bremse AG is very satisfied with the business development in 2023, which was shaped by a gradual decline in what had been high inflation at the beginning of the year, and by geopolitical challenges.

Driven by higher volumes and price increase in order to pass on the higher procurement prices, revenues increased by 10.9% to € 7,925.6 million, which, as expected, was very positive compared with the previous year (€ 7,149.7 million). EBIT was € 869.9 million and thus significantly above the prior-year level by 20.6% (2022:

• 721.3 million). Free cash flow amounted to € 551.7 mil- lion and was therefore significantly higher than in the pre- vious year (2022: € 219.3 million).

The increase in revenues was attributable to the Commercial Vehicle Systems division, which reported an increase of 11.5% to € 4,180.2 million in its revenues. This increase resulted from increased truck production in Europe, Asia and North America, significant growth in both the after- market and OE businesses and price increases to pass on inflation-related costs in all regions. The Rail Vehicle Systems division increased its revenues by 10.2% year on year to € 3,747.5 million. The increase in revenues was primarily attributable to aftermarket business growth in all re- gions.

The Executive Board

Marc Llistosella has been Chief Executive Officer (CEO) of Knorr-Bremse AG since January 1, 2023.

Dr. Jürgen Wilder, the member of the Executive Board responsible for the Rail Vehicle Systems division, left the company at the close of September 30, 2023, and stepped down from the Executive Board at the same time.

As of October 1, 2023, the Supervisory Board appointed Dr. Nicolas Lange to succeed Dr. Wilder for a term of three years. He will hold Executive Board responsibility for the Rail Vehicle Systems division.

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The Supervisory Board

Having reached retirement age, Mr. Erich Starkl stepped down as a member of the Supervisory Board of Knorr- Bremse AG at the close of June 30, 2023. Effective July 3,

Executive Board Compensation

Description of the Compensation System

The system of compensation for Executive Board members in the version applicable since January 1, 2022, should be clear and understandable. It meets the requirements of the AktG as amended by the German Act on the Implementation of the Second Shareholders' Rights Directive (ARUG II) of December 12, 2019 (Federal Gazette Part I 2019, no. 50 of December 19, 2019) and with the exception of recommendation G.11 it follows the recommendations of the German Corporate Governance Code ("GCGC").

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2023, the Munich local court appointed Mr. Wolfgang Nirschl to succeed Mr. Starkl as a member of the Supervisory Board.

The remuneration system of the Executive Board members is composed of fixed and variable components. The fixed components of the Executive Board members' remuneration are their fixed annual salary, fringe benefits, and pension contribution. The variable components are the short-term variable remuneration (short-term incentive, STI) and long-term variable remuneration (long-term in- centive, LTI). The remuneration system also provides for Share Ownership Guidelines ("SOG") for the Executive Board members. An overview of the compensation system is provided in the table below: Fig. 1

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F I G . 1 O V E R V I E W O F T H E C O M P E N S A T I O N S Y S T E M I N 2 0 2 3

Compensation components

Non-performance-related components

Fixed annual salary

Fringe benefits

Pension contribution

Performance-related components

Short-term variable remuneration (STI)

Long-term variable remuneration (LTI)

Other

Share ownership obligation

Payments upon taking position:

Assessment base/parameters

• Fixed, contractually agreed remuneration paid in twelve monthly installments
• Mainly private usage of the company car, insurance policies (accident, D&O), reim- bursement of the employer share in health and long-term care insurance
• Annual payment for retirement benefit purposes
• Aside from this, no company pension scheme is provided.

Plan type	-	Target bonus
Limitation of pay-	- 180% of target amount (Chief Executive Officer; CEO)
- 200% of target amount (other Executive Board member;
ment amount
	OEBM)
	-	EBIT* (30%)
	-	Revenues* (20%)
	- Free cash flow* (20%)
Performance criteria	-	ESG* (20%)
-	Quality (10%)
	- Modifier (0.8-1.2) to reflect the individual and collective per-
		formance of the Executive Board, in addition to stakeholder
		targets
Payout	-	In the month following approval of the consolidated financial
	statements for the fiscal year
Plan type	-	Performance share plan
Limitation of pay-	-	180% of target amount (Chief Executive Officer, CEO)
-	200% of target amount (other Executive Board member;
ment amount
	OEBM)

	- Earnings per share - EPS (50%)
Performance criteria	- Relative Total Shareholder Return - TSR (50%)
- Comparison with MDAX, selected companies in the "Rail and
	Truck" sector and "High Quality European Industrial Goods"
Payout	- Month following approval of the consolidated financial state-
ments for the final fiscal year in the 4-year performance period

• Obligation to buy shares in Knorr-Bremse AG in an amount equivalent to one gross fixed annual salary within four years and to hold them for the duration of the ap- pointment to the Executive Board
• If applicable, compensation payments upon taking office
• If applicable, relocation benefits
• If applicable, guaranteed minimum compensation in the first twelve months

• Measurement of achievement of subtargets EBIT, revenues, free cash flow and ESG is based on the actual values in the consolidated financial statements (where available). The Supervisory Board is entitled to use its reasonable discretion to determine extraordinary influences based on a criteria catalog defined in advance by the Audit Committee. The aim of these adjustments is to measure the actual management performance without distortion, such as by translational FX effects or M&A effects.

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Target Compensation and

Compensation Structure

On the basis of the compensation system the Supervisory Board defines a specific target total compensation for each Executive Board member, which should be in appropriate relation to the tasks and performance of the Executive Board member and the company's situation and should not exceed standard compensation without justi- fication. The Supervisory Board regularly reviews the Executive Board compensation to ensure it is appropriate and in line with the market. The regular review of com-

compensation. The relative proportions of fixed and variable compensation are shown below on the basis of the total target compensation. Fig. 2

F I G . 2 S T R U C T U R E O F C O M P E N S A T I O N E L E M E N T S

CEO: 25% - 35%			CEO: 25% - 35%		CEO: 35% - 45%
OEBM: 40% - 50%			OEBM: 20% - 30%		OEBM: 30% - 40%
Non-performance-re-			Performance-related components/
lated components/fixed
		variable compensation
compensation

pensation takes place as a comparison with companies in the DAX, MDAX and sector-specific companies in the automotive sector (horizontal comparison). A vertical comparison is also carried out, which considers the Executive Board compensation in relation to the employees at other levels of the Knorr-Bremse Group in Germany. Based on the results of the regular reviews of Executive Board compensation the Supervisory Board considers that the com-

	Fixed annual salary in-		Short-term incentive
	cluding fringe benefits
			(STI)
and pension contribution
	Annual payment

Long-term incentive

(LTI)

Payment

after four years

pensation is in line with the market and appropriate.

The Supervisory Board also regularly reviews the compensation structure of the Executive Board members in order to incentivize the company's long-term performance. The target total remuneration comprises the sum of all remuneration components relevant for total remuneration. In the case of the STI and LTI, the target amount is in each case based on 100% target achievement. Long-term variable compensation accounts for a larger proportion of the total target compensation than the short-term variable

On May 4, 2023, the Supervisory Board decided to increase the STI target amount for Frank Markus Weber, who joined the Executive Board as Chief Financial Officer (CFO) as of July 1, 2020, to € 750 thousand per year, and his LTI target amount to € 900 thousand per year, each with effect from July 1, 2023. The increase applies pro rata temporis for fiscal year 2023.

The target compensation of the Executive Board members active in 2023 is presented in the following table:

Table → 4.01

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4 . 0 1 T A R G E T C O M P E N S A T I O N O F E X E C U T I V E B O A R D M E M B E R S

																Dr. Claudia Mayfeld
		Marc Llistosella			Frank Markus Weber			Executive Board Member for
		Chief Executive Officer (CEO)		Chief Financial Officer (CFO)		Integrity, Legal Affairs and HR
		(since January 1, 2023)			(since July 1, 2020)1)			(since May 1, 2021)
in € thousand	2023		In %	2022	2023		In %	2022	2023		In %	2022
Base remuneration		1,000		24			-		900		33			1,100		900		36			867
Fringe benefits		45		1			-		13		0			21		19		1			15
Pension contribution		300		7			-		300		11			300		200		8			183
One-year variable compensation (STI)
STI 2023		1,300		31			-		675		25			-		600		24			-
STI 2022		-		-			-		-		-			620		-		-			600
Multi-year variable compensation (LTI)
LTI 2023-2026		1,500		36			-		850		31			-		800		32			-
LTI 2022-2025		-		-			-		-		-			880		-		-			800
Total target compensation		4,145		100			-		2,738		100			2,921		2,519		100			2,465
		Bernd Spies			Dr. Nicolas Lange			Dr. Jürgen Wilder
		Commercial Vehicle			Rail Vehicle			Rail Vehicle
		Systems division			Systems division			Systems division
		(since March 12, 2022)2)		(since October 1, 2023)2)		(until September 30, 2023)2)
in € thousand	2023		In %	2022	2023		In %	2022	2023		In %	2022
Base remuneration		880		34			641		200		32			-		675		34			900
Fringe benefits		16		1			10		5		1			-		15		1			18
Pension contribution		300		12			241		75		12			-		225		11			300
One-year variable compensation (STI)
STI 2023		600		23			-		150		24			-		450		23			-
STI 2022		-		-			482		-		-			-		-		-			600
Multi-year variable compensation (LTI)
LTI 2023-2026		800		31			-		200		32			-		600		31			-
LTI 2022-2025		-		-			643		-		-			-		-		-			800
Total target compensation		2,596		100			2,017		630		100			-		1,965		100			2,618

1. Due to the temporary assumption of the position of Speaker of the Executive Board, Mr. Weber's compensation in 2022 was increased by a total of € 300,000 on a one-time basis; of this total, € 200,000 was paid as a fixed amount in December 2022, € 20,000 was allocated to an increase in the 2022 STI target amount and € 80,000 to an increase in the LTI target amount for the 2022-2025 tranche.
2. Target compensation for the corresponding fiscal year is shown pro rata temporis due to appointment or departure in the course of the year.

Fixed Remuneration Components

The compensation system for the Executive Board comprises the following fixed compensation components.

Annual salary

Executive Board members receive a fixed, non-performance-related annual salary, which is paid in twelve equal installments as a monthly salary.

Fringe benefits

In addition, Executive Board members receive fringe ben- efits. For each member of the Executive Board, the company bears, in particular, the costs of accident insurance for death or disability, the employer's contribution to private health and long-term care insurance, and a company car that can also be used privately. Furthermore, Executive

Board members are covered by a D&O liability insurance policy.

The company reimbursed the costs of Mr. Llistosella's relocation from Portugal to Munich in the amount of

• 15,167, net, as a one-time fringe benefit, due to his ap- pointment as Executive Board member and CEO. The company also bore the costs of Mr. Llistosella's temporary accommodation for the period from January 7 to May 8, 2023 in the amount of € 11,346, net.

Pension contribution

For the purposes of an old-age pension, the Executive Board members receive an annual pension contribution, payable at the end of the fiscal year in question. Knorr- Bremse AG does not have any pension commitments to current members of the Executive Board.

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Other

The Supervisory Board may, on a case-by-case basis, grant a payment on the occasion of a new Executive Board member taking up his or her position in the first or second year of the new member's appointment. This payment can be used to compensate for, for example, losses of variable remuneration that an Executive Board member faces from a former employer as a result of moving to Knorr-Bremse AG. No such payments were made in fiscal year 2023, neither in connection with the appointment of Marc Llisto- sella as CEO and Executive Board member as of January 1, 2023, nor with the appointment of Dr. Nicolas Lange as Executive Board member as of October 1, 2023.

Variable Compensation Components

The variable performance-related compensation component consists of two elements: a short-term incentive (STI) and a long-term incentive (LTI).

STI

The STI (Fig. 3) is a performance-related bonus with a performance period of one year.

The STI ensures the variable compensation's strategic alignment by directly linking it to the financial performance criteria. Furthermore, the short-term variable remuneration is based on non-financial performance crite- ria. This supports the strategic development of the Group, which also includes social and environmental aspects and takes account of sustainable corporate development.

The first step of the STI is dependent on financial performance criteria and the achievement of quality and ESG targets (collectively the "company STI targets"). In the second step, the Supervisory Board uses a modifier to reflect the individual performance of the Executive Board member, the collective performance of the Executive Board and the achievement of stakeholder targets.

The financial performance criteria for calculating the STI payment in fiscal year 2023 were EBIT, accounting for 30%, and revenues and free cash flow, each accounting for 20%. In addition, target achievement depended on the quality performance criterion, which accounted for 10%, and on internal and external ESG targets, which accounted for 20%.

EBIT refers to earnings before interest, other financial re- sult, and income taxes as recognized in the company's approved and audited consolidated financial statements. EBIT reflects the company's profitability and its value promise to continue delivering a first-class margin.

Revenues are the revenues recognized in the company's approved and audited consolidated financial statements. They are a core element of the profitable growth strategy, and of Knorr-Bremse AG's value promise to grow faster than the market.

Free cash flow is calculated by deducting disbursements for capital expenditure on property, plant, and equipment and intangible assets from the cash flow from operating activities, and by adding proceeds from the sale of prop- erty, plant, and equipment and intangible assets to the cash flow from operating activities.

The performance criteria "quality" focuses on operating activities in the divisions, with quality targets such as the "cost of poor quality" set for both divisions.

ESG targets are also included as a performance criterion. In fiscal year 2023, these consisted of 50% internal ESG subtargets ("ESG internal subtargets") and 50% external ESG subtargets ("ESG external subtargets"). The ESG internal subtarget reflects the own contribution to carbon neutrality (50%) and the change in the number of accidents per 200,000 working hours (50%). The ESG external subtarget tracks the company's positioning in the ESG ratings by the agencies ISS (ESG rating in the Heavy Trucks, Construction and Farm Machinery peer group), SAM (Cor- porate Sustainability Assessment in the IEQ Machinery and Electrical Equipment peer group) and Sustainalytics (CSA rating in the Heavy Machinery and Trucks peer group). Achievement is measured as the average percentile placing, which is the arithmetic mean of the three individual ratings.

The company STI targets were weighted depending on the responsibilities of each Executive Board member. For the central functions, this was either exclusively for the entire Group (Marc Llistosella, Frank Markus Weber, and Dr. Claudia Mayfeld) or 50% for the entire Group and 50% for the segment for which the Executive Board member is responsible (Bernd Spies for Commercial Vehicle Systems, and Dr. Nicolas Lange/Dr. Jürgen Wilder for Rail Vehicle Systems).

The Supervisory Board defines the targets for each fiscal year for the individual performance criteria EBIT, revenues and free cash flow, which are derived from the budget planning. For the quality performance criterion, the Supervisory Board defines a value for each subtarget that corresponds to target achievement of 100%. For the ESG performance criterion, the Supervisory Board defines values for each internal and external subtarget that correspond to target achievement of 100%, as well as a minimum value corresponding to target achievement of 0%

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and a maximum value corresponding to target achievement of 200%.

At the end of the fiscal year the total target achievement is measured on the basis of the target achievement for each performance criterion. To measure the target achievement for each of the performance criteria, the Supervisory Board compares the actual figure with the target figure (budget figure or defined value) for the respective fiscal year. The ratio of the actual figure to the target value (as a percentage) indicates the extent to which the targets have been met, and for the performance criteria EBIT, rev- enues, free cash flow and quality, results in the following target achievement, with target achievement between 0% (for achieving 80% of the target) and 200% (for achieving 120% of the target) interpolated on a straight-line basis.

Total target achievement is calculated as follows:

Total target achievement =

EBIT target achievement x 30%

• revenues target achievement x 20%
• free cash flow target achievement x 20%
• ESG target achievement x 20%
• quality target achievement x 10%

At the beginning of the year, in addition to the performance criteria, the Supervisory Board defines other non- financial performance criteria and their weightings, in order to assess the individual performance of the Executive Board member and the performance of the entire Executive Board and the achievement of stakeholder targets

("performance criteria"). The individual performance criteria are taken into account by means of a modifier. This is set by the Supervisory Board at its professional discretion depending on the extent to which the non-financial performance criteria are met.

The total target achievement measured on the basis of the financial performance criteria and the ESG targets is multiplied by the modifier (0.8 to 1.2) and the defined target amount (in euros) to produce the payment amount. The annual STI payment was capped at 180% of the target amount for the CEO and at 200% of the target amount for the ordinary Executive Board members in fiscal year 2023. The payout amount is due for payment in the month after the approval of Knorr-Bremse AG's consolidated financial statements for the fiscal year relevant for the STI.

Measurement of achievement of subtargets EBIT, reve- nues, free cash flow and ESG is based on the actual values in the consolidated financial statements (where available). The Supervisory Board is entitled to use its reasonable discretion to determine extraordinary influences based on a criteria catalog defined in advance by the Audit Commit- tee. The aim of these adjustments is to measure the actual management performance without distortion, such as by translational FX effects or M&A effects. For the past fiscal year, translational currency effects and effects from M&A and restructuring were adjusted in particular when determining STI target achievement on this basis, as quantified in Table → 4.02below.

F I G . 3 H O W T H E S T I W O R K S
			Total target achievement
			30%		EBIT
Target amount in €	x		20%		Revenues
	20%		Free cash flow
			20%		ESG
			10%		Quality

x

Modifier (0.8 - 1.2)

Individual performance, collective performance of the Executive Board

=

Payment in €

Capped at 180% (CEO) or 200% (OEBM) of the target amount

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The following performance criteria, target values, and actual achievement figures were used to determine STI target achievement for fiscal year 2023 Table → 4.02, Table → 4.03. Under the influence of a very challenging fiscal year 2022, the target values for the performance criteria were derived before the start of fiscal year 2023 from the budget planning

approved by the Supervisory Board. The capital market guidance for fiscal year 2023 confirmed these targets. The outperformance of the guidance for revenues and free cash flow and a year-on-year improvement in the operating EBIT margin lead to a corresponding high target achievement in the EBIT, revenues, and free cash flow performance criteria.

4 . 0 2 S T I T A R G E T A C H I E V E M E N T 2 0 2 3 - E B I T , R E V E N U E S , F R E E C A S H F L O W

Performance criterion

Group

EBIT (in € million)

Revenues (in € million)

Free cash flow (in € million)

Commercial Vehicle SystemsEBIT (in € million)

Revenues (in € million) Free cash flow (in € million)

Rail Vehicle Systems

EBIT (in € million) Revenues (in € million) Free cash flow (in € million)

Executive Board member weighting

Marc Llistosella: 100%

Frank Markus Weber: 100%

Dr. Claudia Mayfeld: 100%

Bernd Spies: 50%

Dr. Nicolas Lange: 50%

Dr. Jürgen Wilder: 50%

Bernd Spies: 50%

Dr. Nicolas Lange: 50%

Dr. Jürgen Wilder: 50%

Floor		Target level	Maximum		Actual value	Adjusted	Target
	value		actual value	achievement
651	814	847	870	887	200%
5,966		7,457		7,564		7,926		7,980		200%
346	433	449	552	575		200%
311	389	404	398	414		200%
3,119		3,899		3,966		4,180		4,173		200%
187		234		245		299		297		200%
391	489	504	532	532		200%
2,847		3,559		3,599		3,748		3,809		200%
308		384		403		403		421		200%

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4 . 0 3 S T I T A R G E T A C H I E V E M E N T 2 0 2 3 - Q U A L I T Y A N D E S G T A R G E T S

Performance criterion

Quality Commercial Vehicle Systems

Cost of poor quality (in %)

Ready for assembly (in ppm)

Raw material (in ppm)

Functional test failures (in ppm)

Intercompany rejects (in ppm)

Zero mileage (in ppm)

Quality Rail Vehicle Systems

Cost of poor quality (in %)

Supplied delivery quality (in ppm)

Delivery quality (in ppm of external delivery quantity)

ESG Group

Own contribution to carbon neutrality (in GWh) (internal)

Workplace accidents per 200,000 contractual working hours (internal)

Relative placing in ESG ranking (external)

ESG Commercial Vehicle Systems

Own contribution to carbon neutrality (in GWh) (internal)

Workplace accidents per 200,000 contractual working hours (internal)

Relative placing in ESG ranking (external)

ESG Rail Vehicle Systems

Own contribution to carbon neutrality (in GWh) (internal)

Workplace accidents per 200,000 contractual working hours (internal)

Relative placing in ESG ranking (external)

Weighting		Floor	Target level		Maximum value		Actual value
60,0%				1.3			1.1
8,0%				275			182
8,0%				3,000			1,433
8,0%				5,500			3,708
8,0%				45			24
8,0%				22			9
50,0%				1.3			1.0
25,0%				950			732
25,0%				1,450			1,241
25,0%	2.2	5.4	8.7	8.2
25,0%	1.16	0.89	0.62	0.65
50,0%	50%	11.5% - 14.5%	5%	11%
25,0%	1.3	3.3	5.3	5.0
25,0%	0.91	0.70	0.49	0.45
50,0%	50%	11.5% - 14.5%	5%	11%
25,0%	0.9	2.1	3.4	3.2
25,0%	1.43	1.10	0.77	0.84
50,0%	50%	11.5% - 14.5%	5%	11%

Target achievement

189%

192%

147%

148%

142%

The Supervisory Board assessed the individual performance of the Executive Board members, the collective performance of the Executive Board and the achievement of stakeholder targets. For the 2023, the Supervisory Board has defined the following overarching objectives for the Executive Board in particular, which are weighted differently: gradual realization of diversity targets for the management levels and the total workforce; further

development of the strategic target of the Knorr-Bremse Group and the divisions; pre-study and implementation plan for the S4/HANA project including implementing the basics with the aim of maximum cross-divisional standardization; realizing the core issues of the global employee survey and developing a strategic target for management culture. On this basis, the Supervisory Board defined the individual modifier in accordance with its professional discretion for all

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Executive Board members in office as of December 31, 2023 as 1.0. When he left the company, the Supervisory Board agreed on an individual modifier of 1.0 for the prorated STI 2023 (January to September) in the severance agreement with Dr. Jürgen Wilder.

This resulted in the following (total) target achievement Table →4.04for the individual Executive Board members.

4 . 0 4 I N D I V I D U A L S T I T A R G E T A C H I E V E M E N T 2 0 2 3

		Target achieve-
Executive Board member		ment: EBIT,	Target achieve-		Target achieve-	Modifier	Total target
	revenues,	ment: quality		ment: ESG targets	achievement
		free cash flow
		70% weighting	10% weighting		20% weighting
Marc Llistosella	200%	191%	147%	1.0	188%
Frank Markus Weber		200%		191%		147%		1.0		188%
Dr. Claudia Mayfeld		200%		191%		147%		1.0		188%
Bernd Spies		200%		189%		148%		1.0		188%
Dr. Nicolas Lange		200%		192%		145%		1.0		188%
Dr. Jürgen Wilder		200%		192%		145%		1.0		188%

LTI (description and award of the 2023-2026 tranche) The LTI (Fig. 2) is a performance share plan in which virtual shares in Knorr-BremseAG are awarded in annual tranches.

In order to link compensation to the company's long-term development, the long-term variable compensation makes up most of the variable compensation and thus a significant proportion of total compensation. With a performance period of four years and an annual award, it is intended to incentivize the beneficiaries to work for the company's positive long-term performance over multi- year cycles. A combination of internal and external performance criteria take the stakeholder and shareholder approach into account.

Each tranche of the performance share plan has a performance period of four years ("performance period"). Each performance period starts on January 1 of the first fiscal year in the performance period ("award year") and ends on December 31 of the third year following the award year.

At the beginning of the award year the Executive Board members are awarded a provisional number of virtual shares (performance share units), calculated using the ratio of the individual target amount agreement in the service agreement and the average XETRA closing price of the Knorr-Bremse AG share in the 60 exchange trading days before the first day of the award year.

At the end of the performance period the target achievement for the LTI is measured and the payment amount defined for each Executive Board member depending on the target achievement.

The relevant performance criteria for the performance share plan are the total shareholder return ("TSR") for Knorr-Bremse AG compared with the TSR for companies from three peer groups ("relative TSR") and the performance of earnings per share ("EPS"). This combines an internal financial performance criterion (EPS) with an external capital market-based criterion (TSR).

EPS are the undiluted earnings after taxes from continuing operations per share presented in the audited and approved consolidated financial statements of Knorr-Bremse AG.

Target achievement for the EPS performance criterion is measured by comparing the average actual EPS and the strategic target EPS set by the Supervisory Board during the performance period. The ratio of average actual EPS to strategic target EPS (as a percentage) reflects the EPS target achievement, which is interpolated on a straight- line basis between 0% for achieving 80% of the target and 200% for achieving 140% of the target.

The TSR refers to the share price performance, on the fictitious assumption that dividends are reinvested, and taking all capital measures into account. It indicates the increase in enterprise value from the perspective of the